Nevsun Resources (NYSE: NSU) is a Canadian mining company headquartered in Vancouver, British Columbia. The company originally started with a number of different mining projects but has since shifted its focus and currently has only one producing asset, the Bisha Mine in Eritrea, Africa. The company has recently used the cash cow potential of this mine to purchase Reservoir Minerals a company that owns the Timok Project in Serbia. This mine should significantly help the company's long-term potential.
Nevsun Resources has had an interesting time recently. Investors were unhappy by the company acquiring Reservoir Minerals with shares instead of cash thereby diluting its equity holders but holding on to its massive cash pile. However, despite this, the company has acquired a significant asset base through Reservoir Minerals that will require a significant amount of cash to startup. The company's present cash pile will help it take advantage of these assets.
More importantly, the company has since multiplied the size of its Bisha mining rights by a multiple of 20x. The company has announced a seven figure exploration program in the Bisha region and recent explorations have yielded amazing results. This exploration program should help Nevsun Resources increase the cash flow potential of the Bisha Mine. Combining this cash flow potential along with the potential of the Timok Mine should help Nevsun Resources' earnings and dividend remain strong for decades to come.
Nevsun Track Record and Potential
Now that we have an overview of Nevsun Resources along with the actions the company has taken recently to improve its market position, it is now time to talk about the company's track record and its future potential.
The above image provides a snapshot of the shareholder friendly company Nevsun Resources is. The company has expanded the Bisha Mine several times deploying almost $0.5 billion in capital. And every single time it undertakes one of these projects, Nevsun resources has come in on-time and under-budget Past this, the company has returned a respectable $130 million to shareholders resulting in continuing growth.
More importantly, the Bisha Mine has managed to increase Bisha District resources by 115% both through growing inferred and m&i resources. Since the mine's startup half a decade ago, the company has increased the mines reserve life by 50%. What this impressive piece of information means is that the Bisha Mine has the same reserve life today as the one it had when the mine first started up, the company has actually managed to replace all of the resources it has pulled out of the ground.
Nevsun Resources Production Growth - Nevsun Resources Investor Presentation
Nevsun Resources expects its production history to accelerate after its recent breakneck pace with the acquisition of Reservoir Minerals. The company expects its Timok Mine will add 300% growth to copper production with 5 years making the company one of the largest copper producers in the world. The company forecasts its copper production with Timok could grow to 375 million pounds per year.
Based on the company's copper costs of roughly $1 per pound along with recent copper prices of $2.23 per pound, that means in 5 years the company's profits will grow to roughly $461 million per year. For a company with a $985 million market cap at present that means that the company's five-year forward P/E ratio is a mere 2.14. This P/E ratio shows just how undervalued Nevsun Resources is based on its future growth prospects.
Now that we have an understanding of Nevsun Resources' track record along with its potential for potential growth from the Timok Mine, it is now time to discuss the developments at the company's cash cow Bisha Mine.
Nevsun Resources Low Cost and Guidance - Nevsun Resources Investor Presentation
The Bisha Mine represents a low cash cost producer that generates significant positive free cash flow. As you can see, despite the rapid fall in copper prices since 2011, the mine has continued to produce significant amounts of copper with low cash costs. The company's H1 2016 copper cash costs represent drops of almost 20% from late-2015 and continue to remain a significant ways below present copper prices. The company is guiding 40-60 million pounds of copper production in H2 2016 pointing to approximately $50 million in profits from the company's copper operations alone.
While the Eritrean government's stake in the mine will eat up $20 million of these profits, that still points towards $30 million in copper profits. With Nevsun Resources' annual dividend expense at roughly $48 million that means the company's Bisha Mine copper expenses alone are enough to cover almost its entire dividend. However, the company's 2H 2016 cash flow should be even higher due to two exciting developments.
The first is the company recently finished its Zinc expansion plant at the Bisha Mine, again on time and under budget like its other projects. This expansion should allow the company to access the Zinc resources of the Bisha Mine producing 70 - 100 million pounds of Zinc in 2H 2016. That means $87.5 billion in revenue which assuming the company's Zinc profit margins are the same as its copper profit margins (the company has yet to provide any guidance on Zinc profit margins) and taking into account the Eritrean government's stake in the mine, that still means $24 million in profits from the company's Zinc operations.
Add onto that, the company's forecast to sell roughly 80 - 100 thousand ounces of gold equivalent from the stockpiles it has built over the years. These gold sales, because they are not pure gold, should result in a lower than spot price per ounce. However, with recent increases in the price of gold, that still means roughly $70 million in revenue. More importantly, these gold stockpiles already exist and have almost no cost to sell. As a result, most of this $70 million will be profit for the company.
That means, based on the company's 2H 2016 guidance, we can expect it to bring in roughly $90 million in profit (assuming the gold has a roughly 85% profit margin and accounting for the Eritrean government's 40% stake). That means that the company is trading at a P/E of just 5.5 annualizing out the company's 2H 2016 profits or a P/E of 9 removing the one time event of the company's gold stockpile sales. Compared to the S&P 500 P/E of just under 25, that means the company, which has yet to even begin realizing profits from its recent Timok acquisition, is trading at less than half the P/E of the S&P 500.
Bisha Mine Remaining Earnings - Nevsun Resources Investor Presentation
The above image provides an overview of the remaining minerals in the Timok Mine. The mine has the potential to generate roughly $3.0 billion in revenue over its remaining lifespan which based on the company's copper profit margins means roughly $1.4 billion in profits. Not bad for a company valued at less than $1 billion. More importantly, a picture of the company's mine lifecycle looked roughly the same 5 years ago. Rather than seeing its lifecycle decrease over this time, the company's exploration projects have kept its reserve life at roughly the same. Should its exploration continue to be successful, the company has the potential to generate a lot more in profits over the coming years.
Now that we have discussed Nevsun Resources' track record and potential along with the Bisha Mine, it is now time to discuss the Timok Project that the company got through its Reservoir Minerals acquisition.
Timok Project Upper and Lower Zone Potential - Nevsun Resources Investor Presentation
The above image provides an overview of the Timok Project. The project is split into the Upper Zone and the Lower Zone. The Upper Zone is a semi massive sulphide deposit containing an astounding 1.02 million tons of copper having a current market value of more than $2.2 billion in inferred mineral resources. The upper zone also has 60 million grams in inferred gold resources worth another several billion dollars.
In terms of indicated resources, the company has 230 thousand tons of copper and 17.7 million grams of gold together worth a very respectable $1.5 billion. More so, looking at the above graph we can see the density of these resources meaning they should be very profitable to mine. The company already has a PFS underway and as we saw above the company expects the mine to triple its copper production in five years.
With a 12 year mine level and a $1.5 billion net present value, that means that the company expects the mine will provide it with roughly $125 million in value every year. Assuming the company maintains the same margins as it has with the Bisha Mine in Eritrea that points towards $57 million in annual income. Since none of this income has to be split with the Eritrean government, that means that this upper zone mine will provide Nevsun Resources with a significant increase in annual profits.
More importantly, these profits come with the addition for the Lower Zone which consists of a massive porphyry style copper-gold mineralization located below the upper zone. What this means is that the upper zone will likely be entirely mined before the lower zone is and this lower zone should increase the potential production life by 15-20 years. This increase in production line from the lower zone means that the Timok Project should provide Nevsun Resources with roughly 30 years of profitable production.
From the above projects, we see that Nevsun Resources have significant profit potential from its current projects. The company has a mere $985 million market cap but it expects its Bisha Mine project to bring roughly $110 million in annual income. That does not count a one off income boost this year from the sale of gold stockpiles along with another income boost in a decade from the sale of additional gold stockpiles.
The company's Timok Project is another beast in off itself. The company expects the Upper Zone will bring it $125 million in annual value which should be roughly $70 million in annual income. Combining these two projects along with the roughly decade mine life from each points to a P/E for the company of roughly 5-6 for the next decade. That does not count the potential for additional exploration in these regions would could significantly increase the reserve life. The lower zone also has 15-20 years of reserve life on top of the upper zone that should increase earnings.
As a result of these earnings, we can clearly determine that Nevsun Resources has immense earnings potential ahead of it. I recommend investors use the downturn in stock price from the Reservoir Minerals acquisition to open a stake in Nevsun Resources or increase their existing one.
Disclosure: I am/we are long NSU.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.